Use of Capital Budgeting Techniques and an Analytic Approach to Capital Investment Decisions in Canadian Municipal Governments

Capital budgeting techniques are useful tools to municipal administrators in managing organizational resources. A survey of capital budgeting practices of Canadian municipal governments reveals that a minority used capital budgeting techniques; payback period dominates over discounted cash flow analysis in evaluating capital investments; and pitfalls are common in its application. More specifically, there is an emphasis of quantitative/financial items over qualitative/intangible factors. In this study, the analytic hierarchy process, a multi-attribute decision model that accounts for both tangibles and intangibles, is presented as a tool for capital budgeting decisions such that resource allocation becomes more effective in municipal governments.     

The Fables and Foibles of Federal Capital Budgeting

This article critically evaluates the notions behind proposals to institute capital budgeting at the federal level. Four critical assumptions are found to be behind the contention that capital budgeting will improve federal investment policies: (1) an agreed-upon and accepted definition of a capital budget exists; (2) a capital budget "adds value" by improving the quality of information; (3) better information leads to better decisions; (4) better decisions lead to better actions. Each of these assumptions is evaluated using examples drawn from various levels of government and from the private sector. The general finding is that if these assumptions hold, then it is reasonable to expect that capital budgeting will lead to better programmatic decisions. Unfortunately, one or more of these assumptions usually does not hold and for this reason the case for federal capital budgeting is not very strong     

The Capital Budget: History and Future Directions

While there is a substantial body of literature concerning capital programming and budgeting in the private sector, there is only a modest literature on this subject in the public sector. Government researchers and public administration scholars have, for about seventy-five years, recognized the value of budgeting for operating expenses and have tried to develop theoretical frameworks for the public budgeting process. However, very little of this attention has been devoted to capital budgeting. As Alan Steiss has stated," The theory of capital budgeting has not been set forth; rather the emphasis... has been on devising and improving the techniques of capital budgeting." Michael White has called capital budgeting an "elusive subject" that "lacks clear definitions, organized traditions of inquiry, conceptual boundaries, standard questions, and reliable data sets."     

Current Practices and Issues in Capital Budgeting and Reporting

Budgeting and accounting professionals, as well as other interested parties, are currently examining ways to improve governmental capital budgeting and reporting. Although progress has been made, major policy issues are still being analyzed and debated. This article provides an overview of current practices and the major policy issues that are being addressed. The discussion incorporates related ideas and observations made by Jesse Burkhead four decades ago. The author concludes that many of Burkhead's insights in the area of capital budgeting and reporting are still relevant and useful today.     

Public Financial Management Systems and Countries' Governance: A Cross‐Country Study

The objective of this study is to explore whether a relationship exists between public financial management (PFM) systems and expert perceptions of countries' governance in an international cross‐country study. We examine the extent to which variations in accounting, budgeting and auditing practices are associated with governance in a sample of 97 countries that represent different levels of development, analysing the differences between countries classified into factor, efficiency and innovation‐driven economies. Our concept of governance perception includes three dimensions: accountability, government effectiveness and corruption. We find that countries with a higher level of economic development show, on average, more sophisticated PFM systems characterized by the presentation of accrual‐based financial statements, the application of value for money audits and higher budget transparency. When analysing the sub‐samples of countries according to the level of economic development, we find that countries with similar governance perception scores show different patterns of PFM practices, suggesting that there is no one‐size‐fits‐all approach. Copyright © 2015 John Wiley & Sons, Ltd.     

Embeddedness and the Articulation of Capital Interests in Norway

This article focuses on organization of capital interests comparatively across sectors and does so by developing an explanatory framework linking organizational patterns to incentives for individual strategies. The key argument is that variations in the political organization of capital interests across sectors, and the linkages between state and capital interests, reflect different degrees of embeddedness. Underlying the embeddedness hypothesis is the notion that the organization of capital can be seen as an alternative to governance through market processes. Organization may replace market governance either by constituting an alternative to internal self-regulation or by channelling regulatory functions through cooperation with public authorities. A set of hypotheses are developed concerning the relationship between degree of embeddedness on the one hand, and organization of capital interest organization and the interface between state-industry, on the other. The overall picture is that we find support for the crux of our argument, but there are important modifications. As for functional differentiation of capital interests we find, in accordance with OUT hypothesis, that highly embedded capital is associated with organizations that have a broad set of functions. Transient capital, on the other hand, has comparatively less stable ties to production systems as well as other social relations, and is thus more difficult to control organizationally. Concerning vertical integration, our hypotheses is only partially supported Looking at the interface between state and economic organizations in the primary sectors and non-embedded sectors such as finance and insurance, we find the data quite in accordance with our hypotheses. Cases with a medium level of embeddedness do not, however, fit our hypotheses as well as the sectors at the two extreme ends.     

Rational Choice and Dysfunctional Institutions

As stated elsewhere in this issue, we cannot claim to explain an institution's origin just by the functions it serves. In part thismay be because of the cognitive limitations of those actors who are instrumental in institutional formation and institutional change. But even more clearly, it is the case that rational instrumental choice does not imply functional institutions. Just as rational choice in a prisoner's dilemma may result in inefficient policies, rational choice by actors with conflicting preferencesfor institutions may result in institutions that are suboptimal. Examples of rational choice explanations of dysfunctional institutions are provided in the area of bureaucracy, regulation, healthcare, and budgeting. I argue that the paradoxes and impossibility results of rational choice theory offer the best insights currently available into the persistent inefficiencies of the world ofpolitics.     

Budgeting for Federal Capital

This article examines the issues involved in federal investment budgeting and planning for the acquisition of federally-owned assets. It describes the unique role of the federal government and examines the different issues and reforms prompted by differing types of capital and investment sponsored at the federal level. It suggests that meaningful changes can be instituted in our budgeting practices that can make a difference for our budgetary choices without adopting a full-scale capital budget. It also presents a framework for improving federal agency capital decision making based on a study of practices used by leading state and local and private sector organizations. The article is based on testimony delivered before the President's Commission to Study Capital Budgeting.     

THE SAUDI ARABIAN BUDGETING SYSTEM: AN INSTITUTIONAL ASSESSMENT

This article describes and evaluates the budgetary institutions in Saudi Arabia. The primary sources of information for this study are publications from the Saudi Ministry of Finance and a survey implemented to investigate the different aspects of budget formulation and execution. We find that the Saudi budget experiences difficulties associated with incremental annual line‐item budgeting systems. Although capital expenditures in the education and health sectors are guided by five‐year plans developed by the Ministry of Planning, the rest of the budget preparation procedure is mainly driven by requests from government agencies to increase spending (i.e. a bottom‐up approach), instead of being based on an early determination of the macroeconomic constraints and the acceptable level of deficit (i.e. a top‐down approach). The result is an exacerbation of tragedy of the commons problems associated with information asymmetry and conflict‐avoidance strategies. We discuss possible reasons for this finding and offer budgetary reform proposals. Copyright © 2014 John Wiley & Sons, Ltd.     

A General Empirical Law of Public Budgets: A Comparative Analysis

We examine regularities and differences in public budgeting in comparative perspective. Budgets quantify collective political decisions made in response to incoming information, the preferences of decision makers, and the institutions that structure how decisions are made. We first establish that the distribution of budget changes in many Western democracies follows a non-Gaussian distribution, the power function. This implies that budgets are highly incremental, yet occasionally are punctuated by large changes. This pattern holds regardless of the type of political system—parliamentary or presidential—and for level of government. By studying the power function's exponents we find systematic differences for budgetary increases versus decreases (the former are more punctuated) in most systems, and for levels of government (local governments are less punctuated). Finally, we show that differences among countries in the coefficients of the general budget law correspond to differences in formal institutional structures. While the general form of the law is probably dictated by the fundamental operations of human and organizational information processing, differences in the magnitudes of the law's basic parameters are country- and institution-specific .     

Do re-election probabilities influence public investment?

An insight from dynamic political economy is that elected officials may use state variables to affect the choices of their successors. We exploit the staggered timing of local and national elections in Norway to investigate how politicians’ re-election probabilities affect their investments in physical capital. Because popularity is endogenous to politics, we use an instrumental variable approach based on regional movements in ideological sentiment. We find that higher re-election probabilities stimulate investments, particularly in programs preferred more strongly by the incumbent parties. This aligns with theory where capital and current expenditures are considered complementary inputs to government production.     

The President's Commission to Study Capital Budgeting: An Interim Review

The President's Commission to Study Capital Budgeting is slated to complete its report by year-end 1998. Even though it would be premature to try to anticipate the Commission's recommendations, it is already clear that the Commission will contribute significantly to the capital budgeting debate by casting the concept of capital budgeting broadly, as a systematic decision process, rather than merely a budget accounting or scoring convention or a government financing alternative to the balanced budget rule. This article summarizes some of the analytical accomplishments of the Commission at the mid-point of its expected life.     

Barriers and Opportunities for Primary Care Delivery Systems: A Case Study from the County Council of Uppsala, Sweden

Reallocation of resources from hospital care to primary care outside the hospitals is one of the leading ideas in Swedish health policy. Since the middle of the 1970's a system of long-term planning at the county level has been the main instrument of realizing this aim. In this case-study of the implementation of a current long-term plan in the county of Uppsala, the problems of health policy planning in a situation of economic crisis are illustrated. The attempt at planning according to the rational model is shown to have been impeded by, among other things, the incremental strategy of budgeting, which was natural in the days of affluence. In the present situation of low economic growth and strong political demands for restrictions on the growth of the health care sector, particularly as regards the hospitals, incremental budgeting will probably have to give way to a more comprehensive form of planning, such as the mixed-scanning strategy.     

Public Capital Investment and Economic Growth in Forth Worth: The Implications for Public Budgeting and Infrastructure Management

There is a common assumption that local government investment in infrastructure stimulates private development. This article examines relationships in one southwestern city between public capital spending and city infrastructure assets and private economic activity as measured by building permit activity, permit values, and assessed property valuations. Two research questions are examined: (1) Is public investment in new capital associated with private capital formation? and (2) Is public investment associated with improvements in the property tax base? The findings hold implications for infrastructure planning, budgeting, and management. First, public and private capital spending patterns varied in tandem across several cycles, and tracking such cycles may help public managers predict short- and mid-term infrastructure needs. Second, utility capital spending is critically related to private capital formation, and may offer higher fiscal returns than other public infrastructure. Third, infrastructure capital had a strong significant effect on the assessed value of urban property, and will therefore influence the property tax base.     

Capital Budgeting and Management Practices: Smoothing Out Rough Spots in Government Outlays

Public capital budgeting and management literature recommends long‐term capital and fiscal planning practices to prevent large fluctuations in outlays caused by fiscal stresses. This study extends the literature by examining the effects of long‐term capital planning and management practices such as the use of a capital budget, separate impact analyses, and the use of bond financing and dedicated revenue sources on capital spending volatility. The empirical results confirm that several of these practices smooth out state government capital outlays that vary because of socio‐economic and financial factors.     

Rational decremental budgeting: Elements of an expenditure policy for the 1980s

The dominant pattern of decision-making on public expenditures has been characterized as incremental budgeting. Wide-spread dissatisfaction with this approach has led to the emergence and testing of various techniques purporting to deal with expenditure decisions in a more rational, analytic and comprehensive fashion. Yet our experience with this brand of synoptic rationalism is at best mixed; few innovations in the field of budgeting have lived up to the expectations surrounding their introduction. A synthesis of the two models outlined in this paper is called rational decrementalism: an expenditure policy for an era of retarded growth or economic stagnation.This is a revised version of a paper presented at the Conference of the Scandinavian Association for Public Administration in Vedbaek, Denmark, May 13, 1980.     

Shifting Priorities: Participatory Budgeting in New York City is Associated with Increased Investments in Schools,Street and Traffic Improvements,and Public Housing

ABSTRACT

In participatory budgeting (PB), residents instead of public officials decide how public money is spent. PB may reveal that residents prioritize different investments than public officials, which could lead to more socially just spending. However, little research has examined whether and how PB shifts spending priorities. This study leverages publicly available records on New York City council districts’ capital project allocations over ten years (2009 through 2018), comparing spending within and across PB and non-PB districts. Multi-level regression models show that, on average, when council districts adopted PB, greater proportions of their discretionary capital budgets were allocated to schools, streets and traffic improvements, and public housing. PB was associated with decreases in spending on parks and recreation projects and housing preservation and development projects. The article shows that priorities shift when residents are directly involved in budgeting. Implications for equity and community well-being, and directions for future research are discussed.     

Federal Intervention in the Municipal Bond Market: The Effectiveness of the Build America Bond Program and Its Implications on Federal and Subnational Budgeting

The American Recovery and Reinvestment Act of 2009 (ARRA) included several new federal programs intended ostensibly to “unfreeze” the credit markets as a result of the global financial crisis. One such program, the Build America Bond (BAB) program, aimed to lower the borrowing costs for state and local governments by increasing their access to capital and providing a more generous federal subsidy than the traditional indirect tax exemption subsidy. BABs are taxable bonds sold by subnational governments, which carry a 35 percent direct federal payment subsidy to the borrower. In creating this program, the federal government hoped that the large direct federal subsidy along with greater potential investor interest in taxable securities would result in lower borrowing costs for state and local governments vis‐à‐vis traditional tax‐exempt bonds. This research study examines the relative effectiveness of the BAB program and details the various quantitative and qualitative implications on federal and subnational budgeting by moving from an indirect to a direct federal subsidy approach in facilitating state and local government capital raising.     

The impact of incumbency on turnout. Evidence from Italian municipalities

We analyse how the presence of an incumbent among candidates at an election affects electoral turnout. We use a rich data set which provides information on the results of Italian municipal elections over the period 1993–2011. We find that the impact of incumbency is heterogeneous across geographical areas: incumbency produces a positive effect on turnout in the South of Italy, whereas we find a negative and statistically significant effect in the North. We speculate that the north-south divergence is related to differences in social capital and in clientelistic relationships established by incumbent politicians. Our conjecture finds support when we look separately at municipalities in the lower and upper quartile of the social capital distribution and at municipalities with high or low densities of organised crime.